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Inflation peaking, but ‘conflicting forces’ keep rebound at bay: Sage Capital
Central bank indications that rate rises are close to cresting will generate positive momentum in markets, but downside risks will remain while the economy soaks up the slack from a turbulent period according to domestic long/short equity fund manager Sage Capital.
In a recent market update, Sage warned investors that the green shoots of relief from central banks will take some time to filter into the economy due to a confluence of factors.
“Headline inflation appears to be close to a peak and central banks have flagged the pace of rate rises will slow from here which has driven positive sentiment in equity and bond markets,” the note to investors stated. “There are conflicting forces around inflation though with goods inflation falling rapidly while tight labour markets and strong wages growth is keeping services inflation elevated.”
Whilst we may be approaching terminal interest rates, policy will likely remain “tight” until slack emerges in labour markets, the manager believes. A recession will be “hard to avoid”, Sage continued, which does present opportunities as not all of the risks inherent to one are being priced in by equity markets.
And while rate rises have caused considerable angst for mortgage holders, the impact on consumer spending and economic activity has been mooted so far. This will change, however, as cheaper fixed rate mortgages expire into more expensive variable rate mortgages in 2023 and cost of living pressures begin to bite.
Sage remains cautious on resources, despite positive diplomatic developments between Australia and China and policy actions to support the reopening of the Asian property market.
“Regardless of pent-up demand from lockdowns, we believe the upside is capped and the large miners’ share prices have overshot fundamentals as China is still heavily exposed to the global manufacturing cycle which will be the main point of weakness to help normalise inflation,” the note stated.
“The market is understandably cautious on the oil price with the bond market signaling a US recession, but this is possibly the point of greatest leverage to a China reopening with increased mobility and travel. We remain constructive on the broader energy complex as a combination of underinvestment and tight European supplies keeping prices elevated.”
